What does compensation mean?
Compensation is what employees earn in exchange for their contributions to your business. The difference between base pay and compensation is that a total compensation package often includes an employee’s base pay (i.e., the minimum they’re paid each paycheck), plus a wide range of other monetary and non-monetary rewards.
Offering a competitive compensation package can help you attract and retain high-quality talent, motivate your current employees to be productive and successful, improve job satisfaction and help your business stay in compliance with federal, state and local regulations.
Types of compensation for work
Beyond salary or hourly wages, there are many different elements that can make up an employee’s compensation package, including:
- Insurance benefits: Healthcare plans can be expensive for people to pay for themselves, so many companies offer employee health insurance plans, as well as other forms of insurance (e.g., life, disability, dental) to make an offer to an employee more enticing.
- Retirement packages: Setting up an employee for retirement is an excellent way to enhance compensation, and it’s commonly done in the form of matching contributions into a 401(k) savings plan.
- Profit-sharing and stock options: Providing stock options to employees is popular both with startup companies as well as highly successful businesses where the stock options represent significant value added to a compensation package.
- Compensated time off: Benefits such as extended vacation time (or even unlimited PTO) can make a job offer more appealing to a potential hire.
- Bonuses: In addition to guaranteed salary or wages, some compensation packages include cash bonuses that are paid out if the company hits specific milestones, at the end of the year or if an employee performs exceptionally well.
- Commissions: For employees in sales or sales-adjacent positions, some companies offer a percentage or flat rate commission to staff when they make sales.
- Overtime pay: In accordance with the Fair Labor Standards Act (FLSA), non-exempt employees (e.g., retail workers, servers) must be paid time-and-a-half in overtime pay when they work over 40 hours per week.
- Additional compensation: Get creative with your compensation package. Other forms of compensation and fringe benefits could include: child care and tuition assistance, travel allowances, gym memberships, employee assistance programs (EAPs), tip income, merit pay and any other employee incentives.
Related: What is Competitive Pay?
What to consider when creating an employee compensation package
It can be hard to decide what to include in a new employee’s compensation package. You have to think about base salary, the benefits you’re required to offer according to state laws, taxes, minimum wage and more. Consider these tips when creating a compensation plan for your business:
- The local market: Understanding the value other companies in your local area are placing on certain roles allows you to determine how much your potential hire could earn elsewhere and what you’re competing with.
- Individual assessment: While the market can help set a baseline for your compensation offer, consider adjusting compensation to match the experience, skills and value-add of each individual employee.
- Skill availability: If an employee is providing a specific skill or set of skills, understanding the scarcity or availability of those skills can help you determine compensation.
- Company finances: Maintaining a responsible budget is important, so factor the financial impact of any compensation package into your plan.
- Previous and coworker salaries: While paying attention to industry norms when it comes to compensation is important, it’s also a good idea to consider how much employees earned in their previous roles and how much your current employees are making relative to the compensation offer.
As you enter into salary negotiations, consider creating a compensation range or salary band. The low end should be a minimum that still shows value to the candidate and the high end should be the maximum that your company can afford.